20 November 2014

Minimal impact on prices

GST MISCONCEPTION: No more than 5pc rise as residential properties are exempt-rated.

THERE is a misconception that house prices will increase more than five per cent following the implementation of the Goods and Services Tax (GST) in April next year.

There is no doubt that the GST will result in an overall price increase, but the impact should be minimal on the residential segment and more on the commercial half.

The market has been talking about a five per cent increase in the prices of residential properties, but developers are not supposed to be charging more for properties built on residential land as they are exempt-rated under GST.

There will be three categories under the GST scheme: standard-rated, zero-rated and exempt-rated.

In the standard-rated category, local supply of goods and services, supply of land and building for commercial, administration or industrial purposes, and construction of all types of buildings will be subject to GST.

The tax will be billed and collected by businesses and paid to the government. Every party, except the final consumer, can claim back credits on the GST that they have paid. This is called input tax.

Goods and services under the zero-rated category will be charged a zero per cent GST rate. This means that GST is not charged to the final consumer but businesses can claim back credits on their input tax. This is applicable for export sales, international services, basic foodstuff (meat, fish, cooking oil) and agricultural supplies.

Exempt-rated GST are goods and services that are non-taxable nor are subject to GST at the output stage. This means that GST is not charged to the final consumer. Businesses, too, cannot claim back credits on their input tax. Examples of goods and services in this category are transport, toll or highway, certain financial services, sales, lease of residential land, residential properties, private healthcare and education.

In the real estate sector, although residential properties fall under the exempt-rated basket of goods, GST will be applicable for commercial property purchases as they are standard-rated.

Urban Well-being, Housing and Local Government Minister Datuk Abdul Rahman Dahlan said recently house prices could increase by two to three per cent post-GST, based on a study by the Real Estate Housing Developers Association of Malaysia.

He said action would be taken under the Anti-Profiteering Act if property prices were to go beyond three per cent.

Abdul Rahman added that developers who raised house prices beyond three per cent could be referred to the GST monitoring committee under the Domestic Trade and Consumer Affairs Ministry.

“My concern is that prices are hiked not because of the GST but due to excessive profiteering. According to our calculations, the increase should only be about three per cent,” he said.

Deputy Finance Minister Datuk Ahmad Maslan said based on the calculations by the Finance Ministry and the Customs Department, any increase in house prices due to GST could be one or two per cent.

That, too, is just temporary as a number of measures have been put in place to curtail the rises, he said.

Among the measures are increasing the real property gains tax from 15 to 30 per cent, increasing the minimum purchase price of houses by foreigners from RM500,000 to RM1 million, and barring developers from using the Developer Interest Bearing Scheme.

Meanwhile, Sarawak Housing Minister Datuk Amar Abang Johari Tun Openg said buyers would not be burdened by the six per cent GST as developers would enjoy an input tax deduction for the building materials that they use.

They have to pay GST for the materials, of course, but at the end of the (building process) chain, developers can claim the amount back.

“The price of houses cannot be higher than what it is now. At the moment, you are paying 10 per cent government tax plus six per cent sales tax. If GST is imposed at six per cent, then it should be lower. That’s the logic,” he said.

Based on the Sales Tax Act of 1972, basic building materials such as bricks, cement and floor tiles fall under First Schedule Goods, in which they will not be subjected to sales tax.

Other building materials fall under Second Schedule Goods, in which they will only be charged a five per cent sales tax.

Under GST, all building materials and services, including that of contractors and engineers, will be subject to GST with a standard rate of six per cent. This will invariably raise the production cost for developers.

Although a developer cannot impose GST on residential properties, the company would have to pay the tax on building materials and services.

The developer could either absorb the higher cost and make less profit, or pass it on to home buyers by raising the house price.

Meanwhile, turnkey contractor and builder Melati Ehsan Holdings Bhd will continue to pursue quality investments and acquisition of landbanks in strategic locations despite the cooling measures put in place and the GST implementation next year, said its executive director Datuk Tan Hong Hing.

“In the first half of this year, the property sector has been relatively quiet as predicted, as the market was reacting and absorbing the cooling measures implemented by the authorities. The second half of the year is becoming slightly active in terms of new launches and prices in selected locations are looking relatively attractive.

“The buying interest should progressively return as potential property purchasers and investors will come to understand that the property prices are unlikely to fall and that potential inflationary pressures from the implementation of GST could further push up property prices. Under the GST, developers will have to absorb the input GST, which is not passed on to the house buyers via output GST,” Tan said.

Melati Ehsan is optimistic to further grow its property arm, especially in the affordable segment, despite the current challenges.

“This segment has been underserved for many years now and there is a strong sign of demand. Overall, the fundamentals that drive the property market are still strong and these are proven in the high number of housing loan applications, but approvals have fallen due to strict assessment criteria implemented under the cooling measures.

“We are constantly looking for new landbanks for future development and expansion plans. Focus will be given to the areas where we have a presence and we will lock it in if the price and payment terms are attractive,” Tan said.

Melati Ehsan has a few construction and development schemes in hand, which have combined order book value of about RM3.8 billion.

Tan said these projects will keep the company busy for the next three to five years, contributing positively to its earnings.

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